TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, June 16, 2018

How The Rich Are Paying Real Estate Taxes Through Non-Grantor Trusts To Dodge State & Local Tax Cap

Bloomberg, How the Rich Can Dodge Trump’s Property Tax Hike:

Jonathan Blattmachr, an estate planning lawyer, is such a fan of the strategy he’s created to help some of his wealthy clients get around the new property tax deduction cap that he’s using it himself.

Blattmachr plans to put his two New York residences -- in Garden City and Southampton on Long Island -- into a limited liability company. Then he’ll transfer interests in the LLC to five separate trusts set up in Alaska, with each taking the maximum $10,000 deduction. By doing so, he says he’ll be able to preserve the write-off for about $50,000 in property taxes he and his wife pay each year on both homes.

“This is an under-the-radar thing and it’s novel,” said Blattmachr, who’s written several books on estate planning.

 The provision most bitterly opposed during the legislative debate was the $10,000 limit on federal deductions for state and local taxes, or SALT. Since the law took effect, half a dozen wealth planners say they’ve seen a surge in interest in so-called non-grantor trusts among residents of high-tax states such as New York, New Jersey and Connecticut.

While trusts are generally used by the richest Americans, non-grantor trusts for property tax deductions make the most sense for the merely well-off who have property taxes totaling up to $100,000, tax experts say. ...

More than 10 percent of taxpayers in New Jersey will see a tax hike under the new law -- the highest percentage in the U.S. -- followed by Maryland and the District of Columbia at 9.4 percent, 8.6 percent in California and 8.3 percent in New York, according to an analysis earlier this year by the Tax Policy Center. Those who’ll pay more are mostly being affected by the state and local tax deduction limit.

Mark Germain, founder of Beacon Wealth Management in Hackensack, New Jersey, said the strategy is “absolutely viable,” adding that he has about a dozen clients who want to create non-grantor trusts.

Building and administering the trusts could cost about $20,000, according to Brad Dillon, a senior wealth planner at Brown Brothers Harriman. But those expenses would be justified after a few years, said Scott Testa, a lawyer who leads the estates and trusts tax practice at Friedman LLP in East Hanover, New Jersey.

Still, the Internal Revenue Service could issue guidance that would prevent taxpayers from using the trusts to get around the SALT cap. An existing provision says that multiple non-grantor trusts with identical beneficiaries and identical grantors -- and whose primary purpose is to avoid taxes -- can potentially be considered a single entity, with just one $10,000 SALT deduction. But the measure has never been bolstered by regulations, leaving it vague.

That IRS provision could potentially derail the whole strategy, Dillon said. But compared to the other workarounds that have been proposed by high-tax states, the non-grantor trust “is the only one that’s come out of the fray that seems like a viable structure,” Dillon said.

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This is the State that is lecturing the federal government on equity and social justice.

Posted by: Mike Livingston | Jun 16, 2018 3:48:47 AM

Actually, this is an individual lawyer who is trying to save taxes. The state has nothing to do with it, but if it did, it would not be inconsistent with either the concept of equity or that of social justice. You really need to think harder.

Posted by: Robert Ricketts | Jun 16, 2018 8:42:13 PM

@ Robert - Tax evasion is social justice?

Posted by: Dale Spradling | Jun 17, 2018 7:39:09 AM

Tax evasion is a crime. This is tax avoidance, which is perfectly legal. Isn't this the sort of thing tax practitioners are supposed to do? Or should it be the goal of tax practitioners to maximize their clients' tax bills?

Posted by: Awesome Anon Name | Jun 18, 2018 7:47:29 AM